A leader in an industry that marches to its own tune: take a bite of Yellow Cake
The firm specialises in turning uranium into nuclear fuel, where an imbalance between supply and demand could get prices moving, says Russ Mould
INVESTORS who do not like the risk that comes with smaller stocks can look away now. Those who run screens for ethical, social and governance (ESG) factors can also move on, as the nuclear power industry is unlikely to pass even the most basic of their tests.
Portfolio-builders who are patient, risktolerant and looking for an industry that more or less marches to its own beat, pretty much regardless of what is going on in the rest of the world, can read on, especially if they are of a contrarian bent. Yellow Cake’s speciality is uranium oxide (U3O8), a middle stage between mining and production of the commodity, and its enrichment, so it can be used as fuel. This expertise means Yellow Cake does not carry the risks that come with the mining process itself.
Long-term supply deals with two major suppliers, Kazatomprom and Cameco, also leave it in a potentially strong position. A trading update last month showed that Yellow Cake owned around 9.3 million pounds of uranium oxide, to give the company a net asset value (NAV) of some $316m, or 292p a share. At the current price of 212.5p the shares trade at a hefty discount to that level and as a result, management has begun a share buyback programme. The discount to NAV may reflect concern that prices could soften again if the Covid-enforced supply shutdowns come to an end, as well as scepticism over the long-term fortunes of the nuclear industry in the wake of the 2011 accident in Fukushima, Japan.
Some investors may also be concerned that they have missed their chance after the surge in the price of U3O8 from $25 a pound to about $33 since the spring. Yet global uranium production in 2019 was estimated to be running at barely 140 million pounds against demand of nearly 170 million. Utilities have stockpiles they can tap, but this year’s mine shutdowns will tighten things further, and uranium spot prices are still below the cost of mining it.
This situation is unlikely to last forever, especially as many utilities are coming to the end of long-term supply contracts and need to establish new ones. If supply and demand stay out of kilter for too long, the price of the commodity could keep rising, just as it did more than a decade ago when uranium peaked near $140 a pound.
Many investors will still turn away, given the risks involved. There could still be further resistance to nuclear power, and it takes two years or so to turn uranium oxide into usable fuel rods, so any further advance in Yellow Cake’s asset valuation may need time. That said, a firm that leads its field, whose core product is rising in price and whose shares are trading at a discount to NAV sounds like a good start for intrepid smaller-company investors.
Questor says: buy Ticker: YCA
Share price at close: 212.5p
Update: Resolute Mining
The saying “Gold is money and everything else is credit” is attributed to John Pierpont Morgan, and the precious metal’s romp to new record highs is currently justifying this column’s faith in it.
A near-term reversal is possible after this year’s stunning run but the long-term case seems intact as interest rates remain anchored at their lows, governments continue to pile up everhigher budget deficits, and central banks are more inclined to add to quantitative easing than withdraw it.
Such a backdrop is naturally helpful for gold miners such as Resolute Mining, which operates mines in Mali and Senegal and owns one in Ghana. A trading update last month featured no negative surprises as the company stuck to its goal of producing 430,000 ounces of gold at an “all-in sustaining cost” of $980 – barely half of the current gold price. Hold.